SIFM. Annual Conference September 19, Overview of Final BEPS Report / Update on Country by Country Reporting Requirements

SIFM Annual Conference September 19, 2016 Overview of Final BEPS Report / Update on Country by Country Reporting Requirements Presenters: John Forni, Managing Director Allen Brandsdofer, Transfer Pricing - Director Jay Turchin, Tax Director

Agenda BEPS Update Status of BEPS and future agenda Country responses / unilateral actions US perspectives US Country-by-Country Update Proposed CbC regulations Global Technology Role Questions Grant Thornton LLP. All rights reserved. 2

BEPS Action Plan Overview Intangibles Action 1 Digital Economy Action 5 Harmful Tax Practices Financing Action 2 Hybrid Mismatch Arrangements Action 4 Interest Deduction Value Action 3 CFC Rules Action 6 Treaty abuse Action 7 Permanent Establishment Transfer Pricing Action 8 Intangibles Action 9 Risk & Capital Action 10 Other High Risk Administration Action 11 Monitoring Action 12 Disclosure Action 13 CbC Reporting Action 15 - Multilateral Instrument Dispute Resolution Action 14 Resolution Mechanism Grant Thornton LLP. All rights reserved. 3

BEPS Timeline UN Committee of Experts on Int l Cooperation in Tax Matters (Geneva) October 2011 G20 Leaders Summit (Los Cabos) June 2012 G20 Finance Ministers Meeting (Moscow) + Initial BEPS-related report published February 2013 BEPS Action Plan July 2013 G20 Leaders Summit (St. Petersburg) September 2013 BEPS Initial Reports Sept. 16, 2014 UK s DPT proposal Sloated UK s DPT goes live Action 1 (Digital) Action 2 (Hybrids) Action 5 (Harmful Tax Practices) Action 6 (Treaty Abuse) Action 8 (TP Intangibles) Action 13 (TP Reporting / CbC) Action 15 (Multilateral Instrument) Australia s MAAL Sloated + First State Aid Decisions Australia MAAL client experience roadmap + Brussels State Aid Decision + EU Anti-Tax Avoidance Package 2012 2013 2014 2015 2016 BEPS discussion +recommendation phase BEPS implementation + monitoring phase G20 Finance Ministers Meeting (Mexico City) November 2012 G8 Leaders Summit (Lough Erne) June 2013 BEPS Final Reports Oct. 5, 2015 All Action Items Grant Thornton LLP. All rights reserved. 4 4

BEPS Current State of Affairs October 2015 Reports Historic point for international tax Consensus final reports categorize actions based on roughly four levels of endorsement: Minimum Standards Common Approaches Best Practices Other Fixed floor for certain tax rules (Ex: A5 and A6) Generally agreed approaches for certain tax rules (Ex: A2 and A4) Approaches to tax rules that merit consideration (Ex: A3 and A12) Outcome has other impact (e.g., administrative) (Ex: A1 and A15) Post-BEPS Era Implementation and monitoring Is next heavy lift monitoring will be particularly important for minimum standards Be wary of unilateral actions particularly in digital space EU seems set to implement across all 28 member states Grant Thornton LLP. All rights reserved. 5 5

BEPS Current State of Affairs (cont.) Post-BEPS Era (cont.) Some continuing work on substantive matters into 2016 / 2017 Finalizing certain TP guidance Attribution of profits to PE due to changes in PE definition Finalizing model treaty provisions / commentary relating to LOB Treaty entitlement for pension funds, REITs, other non-civs Finalizing interest deductibility matters group ratio carve-out, banking / insurance Consideration of work in related areas that have emerged in course of BEPS project Design of an inclusive framework continued developing country participation US-specific considerations Hill / Administration interplay FTC issues will percolate Grant Thornton LLP. All rights reserved. 6 6

Action 2 Hybrids ACTION OBJECTIVES FINAL REPORT Highlights Develop model treaty provisions and design recommendations for domestic law rules to neutralize effects (e.g., double non-taxation, double deduction, long-term deferral) related to hybrid entities/instruments Key areas of concern: Treaty changes to ensure hybrid instrument or entity (incl. dual-resident entity) not used to obtain treaty benefits unduly Domestic Laws to (1) prevent exemption or non-recog n for payments deductible by the payor, (2) deny deductions for payment not includible in recipient s income (nor taxed under CFC rules), and (3) deny deductions for payment also deductible elsewhere Coordination for applying foregoing rules To be coordinated with Actions 3, 4 and 6 Rules should either (a) deny a deduction, or (b) require inclusion w/r/t hybrid scenarios Hybrid mismatch rules proposed using primary rule (denying deduction) and a defensive rule (to kick in if the other country does not have or apply primary rule) Key linking rules target following mismatches Double Deduction outcomes (DD) Deduction / No Inclusion outcomes (D/ NI) Indirect Deduction / No Inclusion outcomes (indirect D/NI) If paid to CFC, generally should not view as D/NI situation if full inclusion at full rate Payment on financial instrument should not create D/NI outcome if mere timing difference and income included within 12 months Initial report released 2014 Significant developments in 2015 report; ~ 80 examples Domestic rule (and possibly treaty) proposals likely to be widely adopted; MNEs with existing intragroup financing need to consider impact if a relevant country adopts rec d rules; the imported mismatch rules are extremely complex US View see new US model; domestic rules need legis. Other Countries EU amends EU parent-sub directive; a December 2015 Germany and Japan protocol adopts items from Actions 2/6/14; UK introduced anti-hybrid rules effective Jan. 1, 2017. But some countries see their existing anti-hybrid rules as adequate(e.g. Holland) Grant Thornton LLP. All rights reserved. 7 7

Action 3 CFC ACTION OBJECTIVES Develop recommendations regarding the design of CFC rules Likely to be coordinated with Actions 2 and 4 FINAL REPORT Identifies six building blocks for design of effective CFC rules Definition of CFC and control CFC exemptions and threshold requirements Definition of CFC income Computation of CFC income Attribution of income Prevention / elimination of double taxation Recognizes that flexibility required (tax policy) Continued work on interaction b/t CFC rules and hybrids even though basic rec. in hybrid rules that subpart F inclusion be treated as if included in ordinary income Highlights Discussion draft April 2015 Final report merely lays out building blocks for effective CFC rules; recognizes that policy objectives of some countries are variable (e.g., territorial vs. worldwide) Not a minimum standard; no serious add l work likely Does identify challenges to existing CFC rules posed by digital/mobile income US View would have liked greater focus in this area, but not expecting more here; see Greenbook proposals Other Countries countries in many cases have relaxed CFC rules (e.g., UK); appears that the EU is interested in seeing robust CFC rules in Europe (see EU Anti-Tax Avoid Pkg) 8 Grant Thornton LLP. All rights reserved. 8

Action 4 Deductions ACTION OBJECTIVES Develop best practices recommendations for design of rules re deductibility of related- and third-party interest expense Consider same for expenses used to produce exempt or deferred income Assess the effectiveness of different types of limitations Develop TP guidance regarding pricing of related party financial transactions (such as financial or performance guarantees), captive insurance and derivatives To be coordinated with Actions 2 and 3 FINAL REPORT Recommends common approach for domestic rules re interest deductibility (link net interest deduction to TI generated by econ. activities) Fixed Ratio Rule (FRR) deduction permitted for net interest (incl. to 3rd party) based on fixed ratio of 10-30% of entity s EBITDA Group Ratio Rule (GRR) for groups that are more highly-leveraged with 3rd party debt, may supplement FRR by applying worldwide concepts rather than those set out in FRR Considerations for applying rules, including for carrying unused deductions / capacity, and averaging EBITDA to limit volatility WHT still should apply to disallowed interest Further work in queue for (a) highly-leveraged industries (banking), and (b) financial txns TP Highlights Broad agreement on 10-30% outlined in 2015 report Countries that already have restrictions on deductibility may be slow or reluctant to implement (assessing whether to replace/modify own rules) No timetable for adoption, but suggests giving taxpayers ample time to restructure Work on rule nuances and issues for highlyleveraged industries into 2016; TP for financial transactions through 2017; review action in 2020 US View largely on-board; domestic rules need legis.; Stack asks whether a problem with highlyleveraged industry before all set out to fix it? 9 Grant Thornton LLP. All rights reserved. 9

Action 7 PE ACTION OBJECTIVES Develop changes to the definition of PE to prevent the artificial avoidance of PE status Target commissionaire arrangements Target advantages arising via the specific activity exemptions of Article 5(4) Work on PE profit attribution issues FINAL REPORT Targets techniques that inappropriately avoid tax nexus (e.g., replacing distributors with commissionaires) Art. 5(4) present (bright-line) exceptions will be subject to over-riding (subjective) provision that activity be non-core (i.e., prep/aux) Expand types of sales agent activity that can give rise to a PE, by changing agent language Dependent agent wording habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise Independent agent may not be independent if works almost exclusively for enterprise that is closely related (>50% direct/indirect) Anti-fragmentation (breaking up contracts or complementary functions amongst group) KEY NOTES Discussion draft Oct. 2014 Although some carve-back from discussion draft, 2015 report still makes big changes Anticipation is that will be widespread adoption of A7, possibly with local changes; significant A1 intersection Some tax authorities may act as though A7 already adopted On agent activity, countries really targeting marketing functions that walk up to line without concluding contracts US View B. Stack has stated that US will not agree to A7 aspects of A15 until see how attribution to PE plays out; sees more PEs within boxes? Other Countries DPT, MAAL, Italy virtual PE, Nov. 2015 Australia/ Germany protocol Grant Thornton LLP. All rights reserved. 10 10

Transfer Pricing Documentation Overview (Action 13) The Action 13 release includes information that should be presented in the master file and local file. While the master file is intended to provide a blueprint for the MNE group, the local file is intended to provide detail on a legal entity s intercompany transactions. The Action 13 implementation guidance calls for the master file and local file to be filed directly with the tax administrations in each relevant jurisdiction as required by those administrations. Master file for MNE Organizational structure, description of MNEs business, intangibles, intercompany financial activities, and financial and tax positions Local file for Entity A Local file for Entity B Local file for Entity C Description of local entity (management & strategy) Description/amount of controlled transactions Functional analysis Selection of method Economic analysis Financial information Country-by-Country report for MNE Same detail as for Entity A Summary data by jurisdiction including revenue, income, taxes, and indicators of economic activity Same detail as for Entity A Grant Thornton LLP. All rights reserved. 12

Action 13 CbC Report compliance The Country-by-Country Report OECD high level recommendations Mandatory filing by the Ultimate Parent Entity for MNEs with revenue in excess of 750 Million Risk assessment tool / close the information asymmetry gap between taxpayer and tax authority See the Master File and Local File for more information Penalty for non-filing Effective for tax years beginning on or after January 1, 2016, with a recommended 12 months period for filing Balancing transparency and compliance costs CbC Report should not be disclosed to the general public Surrogate Filers Grant Thornton LLP. All rights reserved. 13

Country by Country Template (Action 13) Table 1: Overview of allocation of income, taxes and business activities by tax jurisdiction Tax Revenues Profit (Loss) Income Tax Income Stated Accumulated Number of Tangible Assets Jurisdiction Before Income Paid (On Taxes Capital Earnings Full-time (Other Than Unrelated Related Other Tax Cash Basis) Accrued Employees Cash & Cash Party Party Current Year Equivalents) Grant Thornton LLP. All rights reserved. 14

U.S. Country-by-Country Report To be filed on Form 8975 along with your US federal tax return Is Treasury doing us a favor? OECD recommendations which treasury is adopting Mandatory filing by the Ultimate Parent Entity for MNEs with revenue in excess of USD$850 Million Risk assessment tool / close the information asymmetry gap between taxpayer and tax authority Effective for tax years beginning on or after June 1, 2016 due with the filing of your US federal tax return Calendar year taxpayers have until 2017 (with CbC reports due 9/15/2018 with extensions). The gap year issue (still half a problem) voluntary disclosure Countries going beyond the OECD recommendations Penalties What does that mean from a US perspective? Grant Thornton LLP. All rights reserved. 15

Master File (Action 13) Countries going beyond the OECD recommendations (cont'd) Some countries are considering adopting Action 13 requirements with much lower thresholds than the 750 million for CbC As an example, the European Parliament proposed directive considering a 2-out-of-3 test as late at April 2016 (turnover [ 40 million], European headcount [250], size of balance sheet [ 20 million]) Those countries not adopting OECD BEPS Action Item 13 may still ask for the Master File The time is now to draft the Master File and evaluate Local File implications working backwards from the due date of the first Local File does not leave much time Uncover and remediate any risks Determine requirements and timing for approval and sign-off process (e.g., C-suite, legal or other executive involvement) Harmonize CbC with Master File and Local File content Perform dry run CbC report and master and local documentation Consider the big picture and ensure all of the filing information is consistent and coherent What are the risks for proposed adjustments? How can you mitigate those risks? Grant Thornton LLP. All rights reserved. 16

Action 8-10 Aligning Value Creation and TP Outcomes From the September 2014 draft " make sure that an MNE group member that merely provides funding without performing and controlling all of the important functions, providing all assets and bearing and controlling all risks in related to DEMPE of the intangibles will only be entitled to a riskadjusted return on its funding but no more." From the October 2015 draft (regarding CCAs, however the theme is consistent) " a participant must have the capability and authority to control the risks associated with the "risk bearing opportunity" and one only providing funding should receive a limited return, raising concerns regarding consistency with the ALS." OECD BEPS Action 4, Paragraph 6 "any approaches adopted should not conflict with or reduce the effectiveness of regulatory capital rules included to reduce the risk of a future financial crisis" Captives and the BEPSian intent What they are transparent, strategic risk management tools, help create cost efficiencies, allow for the reduction of premiums, etc. What they are not artificial, preferential regimes, providing MNEs with an unfair tax advantage, etc. European Commission Report Captives were also not listed as potential aggressive tax planning strategies Grant Thornton LLP. All rights reserved. 17

Action 8-10 Aligning Value Creation and TP Outcomes Conduct of the parties (focus on people functions and decision making capacity, not just contractual risk) Substance - conduct of the parties versus what is in the contracts what are the parties actually doing? Financial Capacity to bear risk Does party assuming risk: Control the risk? Have the financial capacity to bear the risk? Where the ultimate decision maker doesn t have the capacity to bear risk Transactions that are not commercially rational may be disregarded Grant Thornton LLP. All rights reserved. 18

Action 8-10 Aligning Value Creation and TP Outcomes Special considerations for certain industries How would unrelated parties behave? Delineating the transactions legal agreements, allocation of risk, etc. What would unrelated parties expect? Guidance describes a commercially irrational scenario from the OECD perspective where a captive insurance arrangement for which no third party insurance was available and resulted in an insurance arrangement between related-parties - this arrangement should be disallowed Goes back to having a good functional analysis explaining functions, risks and assets (MF / LF 6662) Using ex ante outcomes as presumptive evidence about the appropriateness of ex ante pricing arrangement for HTVI Does this also apply to risk transfers? Performance of activities can be outsourced, but only by maintaining control via review and oversight Assuming contractual assignment of risk is respected, the transfer pricing must be arm s length Grant Thornton LLP. All rights reserved. 19

Transfer Pricing Aligning TP outcomes with Value Creation (Actions 8-10) Takeaways Analyze each risk and confirm that the allocation of risk is reflected in written contracts and the conduct remains aligned with contractual terms Confirm that TP documentation is consistent with the approach taken on risk Expect time-consuming and costly disputes to increase consider APAs or other dispute resolution mechanics Grant Thornton LLP. All rights reserved. 20

Standardized three- tiered approach to transfer pricing documentation

The three tiers of documentation Master file Goes directly to local tax administration and is not subject to automatic exchange Should provide a high-level overview of the MNE group business, including the nature of its global operations, its overall transfer pricing policies, and its global allocation of income and economic activity Local file Goes directly to local tax administration and is not subject to automatic exchange Rather than provide a high-level overview, should provide more detailed information relating to specific intercompany transactions This includes relevant financial information about those specific transactions, a comparability analysis, and the selection and application of the best method CbC Goes to tax residence of ultimate parent entity and is subject to automatic exchange Grant Thornton LLP. All rights reserved. 22

Roadmap to meeting CbC reporting requirements

Roadmap to meeting CbC reporting requirements Overview of the roadmap and key building blocks Determine approach and methodology Determine data sources and extraction process Determine data adjusting and mapping Choose technology and implement strategy Determine risk metrics Analyze outcomes Vision Data Vision Tech People Policy Grant Thornton LLP. All rights reserved. 24

Key considerations for selecting CbC technologies